State Financing Options for Clean Energy presentation given in April 2011 to NGA by Matthew H. Brown of Harcourt Brown & Carey.

1. State Financing Options for Clean Energy Matthew H. Brown www.harcourtbrown.com

2. Harcourt Brown & Carey: Energy & Finance Consulting and financial advisory firm with a specialty in clean energy financing & related energy policy. Published numerous papers on clean energy finance. Clean energy finance clients include states, utilities, lenders, federal agencies, national and regional associations and advocacy organizations.

3. The Challenge To stimulate economic growth To improve the quality of buildings in which we work and live To reduce the amount we spend on imported energy. And to put people back to work through investments in the above. But States have very limited resources to meet this challenge.

5. Leverage of public capital through credit enhancements

7. Leveraging strategies

10. Finance company

11. Bank

12. Credit Union

14. Credit Unions

15. CDFIs

16. Bonding

17. Federal

18. Other (Treasury)

20. Property Tax

21. Other Fee

23. Foundations

25. Debt Service Reserve

26. Loan Insurance

28. Fixture lien

29. At the meter

31. 3 Types of Capital Capital source determines: costof funds, termof financing, underwriting. Determined by credit quality. Traditional Low-Cost Specialty

34. Requires partnership with CDFIs, utilities.

35. Some specialized capital sources can be used to:

36. 1. make loans in a junior position to senior capital

37. make loans to below-typical credit quality borrowers.

38. 2. make loans for extended periods (eg. 15+ years in residential programs)

40. QECBs reduce the issuer’s borrowing costs by a direct subsidy from the U.S. Treasury (currently approximately 3.8%) leading to issuer costs starting at 1.5%

41. This level of subsidy is far greater than the current taxable/tax exempt spread

43. Projects financed with QECBs must comply with Qualified Energy Conservation Purpose:

44. Energy efficiency, renewable energy generation and green community programs

45. Public sector projects in Colorado, private sector under development

48. Money that a government or utility sets aside to cover potential losses that a lender might incur, up to some maximum amount.

49. If losses are less than the amount of the credit enhancement then the utility gets its funds back or the funds can be used to support additional lending.

50. If losses are greater than the size of the credit enhancement, the lender bears the loss.

54. 5.99% for advanced measures.

55. 6.99% for straight-up ENERGY STAR® measures Administered by a 3rd party lender that specializes in energy lending. Delivered through a certified contractor network& 1-800 number.

56. Michigan Saves: Residential Leverage: $60 million loan facility based on $3 million loan loss reserve . 7% rate to borrower. 10 year max loan term – being raised to longer term. 640 and a higher FICO score required (about 50% of MI population qualifies). Marketed through a contractor network.

57. UTILITY-BASED FINANCING STRUCTURES

58. The Spectrum of Utility-Based EE Financing Move to the right and the utility role diminishes while non-utility role increases. “Utility” could be shareholder or ratepayer funds.

60. Since the utility is not the creditor, it should avoid regulation under TILA.

61. One variant is to have two EFT payments (one for lender and one for utility bill).

63. Illinois Utilities Legislation required utilities to develop efficiency financing programs -- $2.5 million each utility for a statewide total of $12.5 million. Utility ratepayers would cover 100% of defaults. A 3rd party entity conducts all loan origination and servicing. Loan terms TBD. Contract awarded but not public. Our firm working to develop capital source.

64. A Focus on Commercial Lending Attractive because of larger project sizes and much better paybacks on energy efficiency investments. Credit is more difficult to evaluate than residential. Ownership structures are often complex. Loan sizes are often odd (too small for most lending).

66. Conclusions Financing programs can work, if they are streamlined and marketed not just as financing but as a means to better equipment, more energy savings. Financing is necessary but not sufficient to meeting energy policy goals.

68. Convince lenders to reduce their interest rate

69. Convince lenders to extend loan terms

70. Convince lenders to loan to a broader spectrum of the population (riskier loans).